Boston Federal Reserve President Susan Collins on Wednesday, September 6, 2023, expressed the need for a patient approach to policymaking in light of economic uncertainties. Aligning with other key central bankers' sentiments, Collins suggested that the Fed might be near or even at the peak of interest rates but did not rule out further increases depending on subsequent data.
In her speech at the New England Council, Collins advocated for a cautious approach, recognizing the risks while remaining resolute and data-dependent. She echoed similar sentiments from Fed Chair Jerome Powell and Governor Christopher Waller, who have also shown support for a patient approach while expressing caution about recent positive developments on inflation.
The ongoing discussion about policy direction follows one of the Fed's most aggressive tightening cycles in decades. Despite this, market pricing indicates a strong likelihood that the Fed will not raise rates at its September 19-20 policy meeting, with only a 43% probability assigned for a rate increase in the October 31-November 1 meeting, according to data from CME Group (NASDAQ:CME).
Collins also addressed the lags in the impact of Fed policy on the economy. It is generally believed by economists that it takes between one and one and a half years for rate hikes to permeate through the economy. However, Collins suggested that Covid-related factors and strong household and corporate balance sheets could extend these lags.
On Tuesday, Governor Waller said in a CNBC interview that strong recent economic data would allow the Fed to "proceed carefully" as it considers another potential rate hike. Waller's comments came in response to last week's August jobs report indicating that the labor market may finally be cooling down with an unemployment rate rise to 3.8 percent and an addition of 187,000 jobs. Job openings also fell to 8.8 million in July, its lowest level since March 2021.
Inflation remains a key concern for policymakers. While Collins acknowledged some good news on inflation with the Fed's preferred gauge rising just 0.2% in July, she expressed caution about interpreting these figures. She warned of potential noise in the data and suggested that if improvements were fleeting, further tightening could be warranted.
Despite promising developments, Collins stressed that it was too early to consider recent improvements as evidence of inflation returning to a sustained path back to 2%. She emphasized an orderly slowdown aligning demand with supply as essential for ensuring sustainable inflation trajectory back to target.
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